Summary: Commercial Slump Slams Prices
The slump in nonresidential building work has pulled prices for several materials below last year's level and has contractors trimming margins to gain work. Structural steel fabricators and erectors are being hit particularly hard as they face the dual challenge of increased foreign competition in a dwindling market.
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The downturn also has had a dampening effect on inflation and estimators are ratcheting down the inflation rates they use in their bids. "The market is pretty soft right now and construction managers are bidding with some of the lowest fees I have ever seen," says Gordon Sanderson, director of cost management for Gardiner & Theobald Inc.'s New York City office, which is a cost consultant on several large interior renovation projects in the city.
G&T has lowered the escalation factor it uses in its work to 1% to 2% for the next year or two, Sanderson says. A year ago, he was using 3% to 4%. Two years ago, he used a 7% to 8% annual escalation rate. "Lead times are shorter and whatever cost and scheduling problems there are, are less then they were a few months ago," he adds.
Paul Reimer, senior vice president in Hanscomb Inc.'s New York City office, says the firm has cut the annual inflation rate used in its estimates from a high of 5% last year to around 3% after seeing some "examples of extreme competition."
"Prices are totally mixed, with general contractors getting poor margins while margins for some subs are good to excellent," says Donald L. Short, president of Tempest Co., an Omaha, Neb.-based cost consultant. Nevertheless, Short says he has cut the annual escalation rate he uses to 2.5%, or about half of what it was a year ago. "People trying to raise prices on materials like gypsum wallboard or copper water tubing don't appear to be succeeding," he says.
In fact, most producers of construction materials are having trouble maintaining last year's price levels. In April, the Bureau of Labor Statistics released a long list of construction materials showing annual price declines. Over the past year, prices have fallen 8.1% for aluminum sheet, 4.3% for copper water tubing, 4.1% for flat glass, 3.7% for brick, 2.3% for stainless steel products and 1.6% for fabricated steel used in buildings. In addition, there has been slight price erosion for PVC pipe, insulation material, ready-mix concrete and bituminous concrete (see table).
Market conditions also have created a severe slump in construction equipment sales, which has put a cap on prices. Equipment producers were only able to raise prices an average of 0.3% over last year's level, according to the BLS producer price index for April.
Equipment distributors interviewed by ENR say it is difficult to pass along even these modest increases. Many distributors say they have cut prices from last year's levels and are seeing significantly smaller margins. Contractors, wary of federal and state funding cuts, are not in a buying mood, they say.
BUYING HIGH, SELLING LOW. Lower material prices and shrinking margins are reflected in the selling-price construction cost indexes published in this issue. The annual inflation rate measured by Turner Corp.'s construction cost index fell to 0.8% this quarter, down from 1.3% the previous quarter and 3.6% a year ago. The dramatic drop-off in the index's annual escalation rate offers some indication of the pressure on selling prices as contractors chase fewer projects in a depressed market.
| CONSTRUCTION MATERIALS PRICE MOVEMENT IN 2001-02 | ||||||||
| OCT. | NOV | DEC. | JAN. | FEB. | MAR. | APRIL | ||
| AGGREGATES | Monthly % chg. | 0.0 | – 0.1 | +0.1 | +0.5 | +0.5 | 0.1 | +0.3 |
| Annual % chg. | +3.2 | +3.2 | +3.3 | +2.8 | +2.5 | +2.3 | +2.3 | |
| ALUMINUM SHEET | Monthly % chg. | – 2.0 | – 0.3 | – 0.7 | – 0.1 | NA | NA | – 3.6 |
| Annual % chg. | – 4.5 | – 4.2 | – 4.7 | – 5.1 | NA | – 4.6 | – 8.1 | |
| BITUMINOUS CONCRETE | Monthly % chg. | +0.6 | – 0.3 | – 0.6 | 0.0 | – 0.3 | +0.1 | +0.3 |
| Annual % chg. | +3.1 | +2.9 | +1.4 | +0.3 | – 1.0 | – 1.3 | – 0.2 | |
| BRICKS | Monthly % chg. | – 0.7 | – 0.3 | 0.0 | +0.1 | +0.9 | +0.4 | +0.3 |
| Annual % chg. | – 1.3 | – 1.8 | – 2.2 | – 3.9 | – 3.1 | – 3.2 | – 3.7 | |
| CEMENT | Monthly % chg. | +0.2 | – 0.2 | – 0.1 | – 0.1 | – 0.1 | – 0.5 | +0.7 |
| Annual % chg. | +0.7 | +0.3 | +1.0 | +0.4 | +0.5 | +0.3 | +0.1 | |
| COPPER, PIPE & TUBE | Monthly % chg. | – 2.6 | – 1.2 | – 1.7 | – 1.1 | – 0.3 | +2.7 | +0.1 |
| Annual % chg. | –10.4 | –10.7 | –11.6 | –10.8 | –11.1 | – 8.2 | – 4.3 | |
| FABRICATED STEEL, BLDG. | Monthly % chg. | – 0.4 | +0.1 | 0.0 | – 0.6 | – 0.2 | – 0.2 | 0.0 |
| Annual % chg. | – 2.1 | – 2.1 | – 1.5 | – 1.8 | – 1.8 | – 2.1 | – 1.6 | |
| DIESEL FUEL | Monthly % chg. | –17.1 | – 6.1 | –21.2 | +5.5 | +0.8 | +16.2 | +12.2 |
| Annual % chg. | –31.0 | –35.5 | –44.7 | –38.7 | –35.4 | –16.8 | – 9.9 | |
| GLASS, FLAT | Monthly % chg. | – 0.2 | – 1.0 | – 0.8 | – 0.4 | +0.5 | – 0.4 | – 0.2 |
| Annual % chg. | +0.1 | – 0.9 | – 2.2 | – 4.4 | – 3.5 | – 3.6 | – 4.1 | |
| GRAVEL | Monthly % chg. | – 0.1 | – 0.1 | +0.2 | +0.6 | – 0.1 | +0.3 | +0.2 |
| Annual % chg. | +3.0 | +2.9 | +3.4 | +2.7 | +2.3 | +2.4 | +2.1 | |
| GYPSUM PRODUCTS | Monthly % chg. | +4.4 | +5.8 | – 3.0 | – 1.0 | +1.2 | – 3.0 | +2.0 |
| Annual % chg. | – 8.8 | +0.4 | +0.2 | +3.4 | +0.1 | +1.3 | +5.7 | |
| INSULATION | Monthly % chg. | +3.1 | – 1.0 | – 0.7 | 0.0 | – 2.6 | +0.1 | – 0.9 |
| Annual % chg. | +4.8 | +0.6 | – 0.1 | 0.0 | – 1.1 | +0.5 | – 0.3 | |
| LUMBER, SOFTWOOD | Monthly % chg. | – 4.8 | – 0.9 | – 1.5 | +6.5 | +1.2 | +2.7 | +0.3 |
| Annual % chg. | – 1.5 | – 1.4 | – 2.4 | +6.7 | +6.0 | +7.5 | +7.1 | |
| PAINT | Monthly % chg. | – 0.5 | +0.4 | 0.0 | +1.0 | – 0.1 | +0.6 | +0.8 |
| Annual % chg. | +2.0 | +2.1 | +1.9 | +2.4 | +1.3 | +2.0 | +2.6 | |
| PLYWOOD | Monthly % chg. | – 6.0 | – 0.9 | – 1.5 | +0.3 | +3.4 | +4.3 | – 0.6 |
| Annual % chg. | – 2.3 | – 1.5 | – 1.9 | +1.0 | +5.4 | +8.2 | +8.2 | |
| PVC, PIPE | Monthly % chg. | – 0.2 | – 0.8 | – 0.8 | +0.6 | – 0.6 | – 0.3 | +3.0 |
| Annual % chg. | – 3.8 | – 2.0 | – 2.7 | – 0.8 | – 2.2 | – 2.9 | – 0.9 | |
| READY-MIX CONCRETE | Monthly % chg. | 0.0 | +0.1 | +0.1 | +0.1 | +0.3 | – 1.9 | +0.3 |
| Annual % chg. | +2.0 | +2.4 | +2.5 | +2.9 | +1.9 | – 0.1 | – 0.1 | |
| SAND | Monthly % chg. | – 0.3 | – 0.2 | 0.5 | +1.1 | – 0.2 | +0.3 | +0.7 |
| Annual % chg. | +2.2 | +2.1 | 2.7 | +3.0 | +1.8 | +2.2 | +2.2 | |
| STONE, CRUSHED | Monthly % chg. | – 0.1 | – 0.1 | +0.2 | +0.6 | – 0.1 | +0.3 | +0.2 |
| Annual % chg. | +3.0 | +2.9 | +3.4 | +2.7 | +2.3 | +2.4 | +2.1 | |
| SHEET METAL | Monthly % chg. | +0.1 | 0.0 | +0.1 | – 0.2 | +0.2 | – 0.1 | +0.9 |
| Annual % chg. | – 0.8 | – 0.8 | – 0.6 | – 0.7 | – 0.6 | – 0.8 | +0.4 | |
| STAINLESS STEEL | Monthly % chg. | – 0.9 | – 1.0 | – 0.7 | – 0.1 | – 1.2 | +1.2 | +1.6 |
| Annual % chg. | –14.6 | –13.0 | –11.4 | – 9.0 | – 8.7 | – 5.8 | – 2.3 | |
| STRUCTURALS, LIGHT | Monthly % chg. | 0.0 | – 1.2 | – 1.1 | – 0.5 | +0.2 | +0.5 | +0.2 |
| Annual % chg. | – 6.4 | – 7.5 | – 8.2 | – 8.7 | – 7.9 | – 7.2 | – 6.7 | |
| Source: Bureau of Labor Statistics, NA=not available | ||||||||
"Some major metropolitan markets appear to be experiencing a slowdown, and construction labor utilization has fallen nationwide," says Karl F. Almstead, Turner's vice president responsible for the index. While "current market sentiment is apprehensive," Almstead believes that "optimism for the future remains strong."
In contrast, inflation measured by general purpose indexes held steady in the second quarter. Eight general purpose indexes, which simply track input costs for labor and materials, show average annual increases of 2.5% this quarter, up from 2.4% the previous quarter and just 1.6% the year before.
The growing spread between these two groups of indexes shows just how much pressure is on company marGins. Last year, cost indexes measuring selling price were iNcreasing about 2% faster than those measuring input costs, indicating contractors were enjoying some degree of profitability. In today's market, the situation has been reversed, with indexes measuring input costs rising about 1.7% faster than the selling price indexes, which indicates that margins are being squeezed.
The general purpose indexes are being propped up by a new round of union collective bargaining settlements that seem to be following last year's trend toward longer agreements with larger increases. In the case of ENR's construction cost index, the labor component is up 4.7% above 2001's level, significantly higher than the 3.3% annual increase for the same period last year.
Workers in several cities seem to be in the mood to fight for these higher wages after nearly a decade of accepting moderate increases. In Connecticut, a two-week carpenters' strike ended when the union accepted a 9% wage hike in each of the next four years for heavy/highway carpenters. And in Minnesota, Twin Cities roofers ended a month-long strike by accepting a five-year agreement in early June, with annual hourly wage hikes starting at $1.90, says Jim Bigham, administrator of the Twin Cities Roofing Contractors Association. Meanwhile, two Twin Cities pipefitting locals have entered their sixth week on strike.
In Kansas City, union carpenters, cement masons, plasterers, ironworkers and painters all reached three-year pacts with contractors calling for annual hourly increases ranging from $1.60 to $1.75. The painters' deal came a week after their previous agreement expired, but they agreed not to strike since negotiations were in progress, says Marilyn Mahnke, labor relations administrator for the Builder's Association of Missouri.
ABSORBING THE IMPACT. Lumber and steel prices spent most of the second quarter adjusting to the impact of U.S.-imposed duties and tariffs on imports that went into effect near the end of the first quarter. Domestic lumber mills reacted quickly to the 29% tariff the U.S. placed on most imported Canadian lumber on March 22. By May, the lumber component of ENR's cost indexes had increased 4.4%. However, the rebound may be short lived, with ENR's 20-city average price for pine 2x4s slipping 2% in June.
Also at the end of March, the U.S. placed a 30% tariff on most imports of flat-rolled steel products, including plate. Domestic prices responded immediately. The composite price for flat-rolled products compiled by the forecasting firm DRI-WEFA, Washington, D.C., increased 8.8% in April and another 6.3% in May, lifting the composite price to its highest level since July 2000. In contrast, the composite price including light structurals and rods, which are excluded from the tariff, increased just 1.3% during the same period.
However, structural prices may soon come under downward pressure with a new mini-mill opening during the third quarter, which could bring 200,000 new tons of product on the market this year. The mill, run by Fort Wayne, Ind.-based Steel Dynamics, plans to bring annual production up to 800,000 tons by 2003 before hitting its full capacity level of about 1 million tons in 2004. Initially, the firm will concentrate on 8-in. to 24-in. beams, but eventually will produce a range from 6-in. to 36-in.
SPECIAL REPORT: Second Quarterly Cost Report: Steel: Still Struggling with Imports
SPECIAL REPORT: Second Quarterly Cost Report: Lumber: Prices Staff After Brief Rally
SPECIAL REPORT: Second Quarterly Cost Report: Equipment: Sales Slump Flattens Prices
SPECIAL REPORT: Second Quarterly Cost Report: Compensation: It is Now a Buyers' Market
SPECIAL REPORT: Second Quarterly Cost Report: Labor: Wage Hikes Gain Momentum